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Last week I met the management of Shakti Pump, the stock has moved up 250% in last 6 months and there is a lot of hype as management has guided for sales growth of 70-80% in FY2018, Midcap Moghul kenneth Andrade’s entry at 476/Share via bulk Deal has made it a hot topic around the HNI Circle. The promoter has been aggressively buying from the Open Market for last 6 months.

Here i was meeting a company which had high Growth Expectations, Promoter Buying from the Market, Marqee Investors Getting in and a lot of momentum in the Stock. The Only Question i had is this really a Good business or the Promoter is selling Snake Oil.

These are the 5 key takeaways from the management meet.

 

1)  Lets First understand the Business & History- Shakti Pumps was mainly into the export market till 2013-14 and had 65-70% of its revenues from exports, this small but aggressive management decided that they want to expand in the Indian Market and Hired Bollywood Super Star Amitabh Bachchan as their Brand Ambassador. Since then the middle east which was their main export market started facing problems in 2014 due to sanctions in Iran, the company struggled for 2 years though the Indian Market was picking up. Today the company’s 75% Sales comes from the Domestic Market whereas only 25% Sales comes from the Export Market.

Shakti Sells Stainless Steel Pumps in the Solar Pump Segment as well as to Industrial Segment.

 

2) The Opportunity Size and Revenue – I was curious about how would the company achieve 70-80% Sales growth and was the growth Sustainable? The management said they have have 50-60% market share in the Solar Pump Category and that the government gives 85% subsidy on it. The selling price of a Solar Pump is between 4-5 Lakh, whereas the company only makes the Pump, it outsources the other parts like solar panels from other vendors.

The management started by saying that NITI Ayog has planned to install 30 Lac Solar Pumps in next 3 years and tenders for 1.14 Lakh are already tender ready.  In Value Terms it was a 1.2 Lakh Crore opportunity, which sounded insane but wait for it as there is always a catch.

The Company also supplies Stainless steel pumps which is ofcourse its main business where realization is 30,000-40,000/Pump and has marqee clients like Tata’s, Adani, Jain Irrigation. These clients also bid for solar pumps contracts by the government but they source the pumps from Shakti as its the leader in Stainless Steel Pumps

 

3) A comparison with Peer – I asked them why would they choose Shakti pumps over a global leader like KSB Pumps. Akhilesh Maru, the CFO told me that every company that install’s a Solar Pump has to give a 5 year Guarantee to the farmer. Now the installing company has two options, either to go with Iron Pumps which are not energy efficient as they rust over time or go with Stainless Steel Pumps of Shakti Pumps which don’t rust and are 5 Star rated on energy efficiency. The Pricing difference between Iron Pumps and Stainless Steel is about 20% but cast iron (KSB’s Products) rust over time. He went on to say that even though KSB has 1-2 models of stainless steel pumps, we at Shakti have 2000 SKU’s in Stainless steel pumps, from 250W to 250KW. Shakti Pumps has enjoyed higher operating margins of 15% v/s 11% for KSB Pumps.

 

4) Promoter Buying Reality or Fake? – Promoter has bought 2.1% Stake from the Market in last 5 months till about 400-450/Share. Interestingly ML Securities a company owned with a person who has the same surname as the promoter i.e. patidar sold 2.5% in the open market. I asked with a smile that how are we related to ML Securities, he smiled and answered that out of 800 employees at Shakti, 150 are patidars, ranging from a clerk to a manager. My Team at Stallion asset had already done some work which showed that there is a high probability of this being a related party and they also acquired warrants in Shakti Pumps at 176/Share.

 

5) Execution of Solar Pump Projects? – The whole story of Shakti Pumps depends on Solar Pumps order, which is largely a subsidiary based business, and a lot of government interventions. Devendra Fadnavis (Chief Minister of Maharastra) who was the biggest optimist of solar Pumps in 2015 lately said that we rather give subsidiaries on Small Solar Panel generation plants within a village rather than specifically for Solar Pumps for every farmer in a press interview 2 months back. Hence i asked about Execution risks, and they agreed that the business depends on government but they have guided only 500 crores for solar pumps of revenues out of which 250 Crores comes from government backed complete solar systems i.e. assuming 4.5 Lakh Average ticket size, they need to install only 5,500 pumps which is only 5% of the total tender book of 1.14 lakh Pumps. Since they have 50-60% Market Share in Stainless Steel pumps, they will also get orders from other bidders of the Solar Pump which will complete the other 250 Crores guidance.

 

Conclusion – The management has gone through tough times in 2014-2016 and has emerged strong. Mr Patidar seems to be an optimist and ambitious but we at Stallion Asset know that when it comes to government based orders especially where there are subsidies involved odds are the business will face a lot of turbulence time and again. Markets are pricing in that they will do 700 Crores of Sales and about 50-55 Crores of Profit in FY2018. The longevity of the business depends on the success of Solar Pumps and the business is in its initial stages, will it be a outright failure or a very large trend only time will tell, but we need to track this story carefully.

Disclosure – Amit Jeswani & Family have Vested Interest.

This is not a recommendation and please use this for education purpose only

Yesterday my team at Stallion Asset & I attended the Edelweiss Investor Day meet, and these are the 5 main take away’s from the meet

1)The Larger Trend in Financial Services Space – Financial Services in India are at the same stage as they were in the US in 1980 where it was 2.4 Trillion $ Economy (GDP) and China was at 2.4 Trillion in 2003.

India will be a 5 Trillion Dollar Economy i.e. it will double in the next 8 years. China took 5 years to double, US took 10 years to double from 2.4 to 5 trillion$. It is expected that when India Grows from 2.4 Trillion GDP to 5 Trillion Dollars, financial services will grow 5x in revenues and 6x in Profits.

 

Rashesh Shah mentioned that PSU Banks are growing at 3-4% which is about 70-75% of India’s Credit, whereas Private Banks are growing 18-20% and NBFC’s are growing at 22-25%. He sounded Optimistic that this trend will continue for the foreseeable future though he did believe that NBFC’s are scalable to 1,00,000 Crores AUM and post that it’s smarter to be a bank. Edelweiss has a Loan book of 42,000 Crores and being a NBFC for next 3-4 years is prudent for them.

 

2) Democratization of Credit in India – OMG FACT – The Top 45 Business houses in India are 50% of Nation’s banking debt even after nationalization of banks. The Top 20% of India is well banked and Opportunities are now on the lower ticket size retail lending (80% of Population). With Upsurge of MFI, SME Lending, consumer finance is the next big trend which are small ticket size loans with higher NIM spreads. Rashesh Sounded very positive on Retail Finance and he has walked the talk with retail Credit growing 46% in last 3 years. There are market rumours that Edelweiss may acquire Manappuram as Nandakumar’s 2nd Generation isn’t Interested in running the business. We believe this could be a marriage made in heaven as Manappuram would be immediately re-rated to 3.5-4x Book, and moats are very strong in gold finance business. Every NBFC and a few banks at some point have tried getting into gold finance but failed miserably.

 

3) My Chat with Siby Anthony (CEO of Edelweiss ARC) – He is also called the Mogul of turnarounds in India and very smart guy, obviously knows the distressed debt game really well. He is the person who has made edelweiss get 40-50% Market share in ARC in India. Rashesh Sounded very positive in India and Said about 20,000 Crores of fresh investments will be needed every year in Distress debt and the opportunity size is massive.

I knew ARC will be a big business, but why did Rashesh sell 20% of it so cheap at a valuation of just 2,500 crores to Canadian Pension is what i asked Siby Anthony? – He said we need the tap of money to be always open, Canadian pension has a lot of money, and we need a lot of investments, it made sense to us.

I wanted to understand the ARC business, and i asked a few questions on it and the ROE of the business, where he jokingly told me that unless he screw’s up very badly, he will make a ROE of 13% on it. If he works mediocre they are good to make 20-25% ROE in it, but if they get it right, they could make a killing.

I Asked him that if there are stock & sectors he could buy now, what would those be? Well the Answer of this Question was superb but lets say i cant disclose it here and keeping it for Clients of Stallion Asset.

 

4) Loss Given Default not NPA – Rashesh Shah gave a heads up of what he exactly thinks about the NPA Situations especially about banks. He Said i would rather have a 4% NPA in a Housing Finance Business rather than a 2% NPA in a Project finance Business.  He Said, GNPA is not really the true assessment of the health of a bank and the strength of its balance sheet going forward. To truly estimate the potential financial hit the bank will take, Loss Given Default (LGD) is a more comprehensive and appropriate measure. LGD is the share of a loan that is lost when a borrower defaults. This will, of course, vary  depending on the kind of loan and the extent of collateralisation.

He gave out Industry Numbers which got my eyes glittered as this is a new way of thinking about defaults.

 

 

 

 

This meant that if Some one Defaults 1000 crores in a Housing Finance book, the real loss would be just 150 crores and the rest would be recovered as there is collateral whereas on a project finance book if someone defaults worth 1000 crores, the loss would be 600 crores. We at Stallion Asset have decided to now go deeper in NPA profile of banks, probably there might be some bank which has high NPA but its actually due to its home finance or SME book which can get recovered but the markets are mispricing it.

5) Diversified NBFC will survive – Rashesh Shah has understood that the key for a sustainable NBFC is right capital allocation and risk management which can be done very smartly by diversification. Lets take an example of a only microfinance business like Ujjivan which had to lend even after demonetization, but if they had only 7% of their assets in Microfinance, they would have obviously stopped lending for some period like Arman Finance did. Mahindra & Mahindra finance was aggressively lending to the farm sector in 2012-2015 even though the farmers were defaulting because thats the only business they were in. Someday Interest Spreads in housing finance business will get squeezed as more and more Housing finance companies enter the market, but One product housing finance companies will have to continue to lend, just to survive. Edelweiss wants to create a 1,00,000 Crore loan book divided in 10 verticals so they can stop lending as risk increases, or increase lending in a vertical as opportunity increases. We believe a diversified NBFC is atleast 5x more safer than a concentrated one segment NBFC and deserves a higher valuation.

 

Conclusion – India is in a long term secular trend and Financials are expected to grow 5-6x faster than the country’s GDP Growth. We remain bullish on financials where there is a passionate management team, who is ready to go a extra mile for its stakeholders.

The above was written by Amit Jeswani, CFA, CMT (Founder of Stallionasset.com)

We provide independent equity Advisory services Plans Start 8,999

Disclosure – Amit Jeswani & Family may or may not hold the stocks discussed. Please use this education purpose only and Stallion Asset won’t be responsible for data.

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